At the LDI Health Insurance Exchange Conference on April 13, Eric Johnson presented some results from an experiment. He gave 120 subjects a choice of health insurance plans. All they were told to do was evaluate the best plan for them based on reported premium, copayments, and deductible. This turns out to be a hard problem for most people.
The math is relatively straight forward. One must compute, for each plan,
(12*Monthly Premium) + (N of visits * Copay) + min(Out of Pocket Costs, Deductible)
and pick the minimum. Here’s what happened when this sample was offered first four and then eight plans:
<img src=”http://media.khi.org/img/photos/2013/04/15/more-isn-t-better.jpg” />
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The blue bars report the proportion of subjects selecting the optimal plan. The red report the average out-of-pocket cost of the error in doing so. Even with four plans to choose from, people make a lot of errors. When the number of plans increases to eight, the errors multiply.
To be sure, things can be done about this. Decision aids and calculators can help people make better choices. Much of the rest of Johnson’s talk was about such things. The point is that one has to anticipate that choice can impede market efficiency and do something about it if one is relying on a relatively efficient market to drive costs down for consumers and taxpayers.
This is a nice counterpoint to my post yesterday on how much competition we need in exchanges. The right answer isn’t always or simply “more” even if it is “more than we have now.” The story, as always, is more complex than that.
— Austin Frakt is a health economist and an assistant professor of health policy and management at Boston University’s School of Public Health. His blog is at The Incidental Economist. The opinions in the columns solely reflect those of the author. They aren’t endorsed by the Kansas Health Institute, which seeks a broad range of opinion to stimulate discussion.